1. Field of the Invention
This invention relates to the field of investment management and, in particular, to a system, method and computer program product for providing stabilized annuity payments and control of investments in a variable annuity.
2. Description of Related Art
A continuing challenge of investment management is to provide options that match an investor's objectives. In retirement, investors often need to receive a stream of periodic payments from their investments in order to pay their living expenses.
Annuities are a common form of investment vehicle for providing the stream of payments. An annuity is funded with an initial principal amount, commonly termed a contract amount. Periodic payments are provided to the annuitant, based on the contract amount, and the number of payments that are anticipated to be made from this annuity. Annuities are available in many forms. The distributions may be made for a predetermined definite period, as in an annuity certain, or for as long as the person lives, as in a life annuity. Payments under a life annuity may terminate on the annuitant's death, as in a straight life annuity, or may continue to a beneficiary for a specified period after the annuitant's death, as in a life annuity with period certain. The payments under an annuity may be set to begin one payment after purchase of the annuity, as in an immediate annuity, or after a specified amount of time, as in a deferred annuity. Finally, the cash value of an annuity is the commuted value of benefits payable irrespective of whether the annuitant is still alive.
As with most investments, there are risks associated with annuities. In a life annuity, in which payments are made until the death of the annuitant, there is a risk to the entity providing the annuity that the annuitant will live longer than anticipated, which results in a reduction in the amount of periodic payments driven by a continuing reduction of the principal amount to provide these payments. In a life annuity, there is also a risk to the investor of the annuitant living a lesser time than anticipated and not receiving a sufficient number of payments to have justified the initial investment.
These risks are further compounded by the risks associated with future economies. In a booming economy, the principal amount may provide a return-on-investment that exceeds the rate at which the periodic payments diminish the principal amount. In an inflationary economy, the value of the periodic payments may be insufficient to meet the intended need for these payments. Similarly, in a depressed economy, the return-on-investment may not be sufficient to match the rate at which the periodic payments diminish the principal amount.
In a conventional fixed life annuity plan, the provider or guarantor of the annuity plan assumes most of the long-term risks. The annuitant is guaranteed a level payment amount for the duration of the annuitant's life or, if there are multiple annuitants, for the duration of the annuitants' lives. If the guarantor is able to invest the contract amount at a higher rate-of-return than the rate-of-depletion of the principal by the periodic payments, the guarantor earns a profit. If the annuitant dies before the principal is depleted, the guarantor also earns a profit. If the principal is depleted before the annuitant dies, the subsequent periodic payments are borne by the guarantor, at a loss to the guarantor. Fundamentally, a fixed annuity alleviates the investor of the risk of outliving the source of income from the investment. For ease of reference, the terms investor and annuitant are used herein interchangeably, although it is recognized that one person, the investor, may purchase an annuity for another, the annuitant.
Although the typical investor might desire to shift the long-term risk to the guarantor via a fixed annuity plan, the investor is typically unwilling to assume the risk of losing the investment based on the short-term risk of dying prematurely. In other words, in a fixed life annuity, when the investor dies, the investor's beneficiaries are deprived of the investment amount, which they would have received if the annuity had not been purchased. To increase the marketability of a fixed life annuity, conventional fixed annuity plans offer a guaranteed minimum payment amount and duration (sometimes referred to as certain period or inheritance period), independent of the annuitant's life, to offset this reluctance on the part of the investor to assume the short-term risk of a loss of investment. If the annuitant dies prematurely, the guarantor continues to provide the guaranteed number of payments to the beneficiaries of the annuitant.
A fixed annuity, however, does not protect an investor from the long-term risk of inflation causing the periodic payments to lose purchasing value. To offset this risk, some conventional annuity plans offer a guaranteed payment amount that is dependent upon an annually determined inflation rate. To offset the assumption of this additional risk, the initial payment amounts are generally slightly less than the payment amounts of a conventional fixed life annuity plan.
In both the fixed life annuity and the annuity with inflation protection, the guarantor assumes the long-term risks, and, correspondingly, enjoys the benefits of any long-term gains. A typical annuity may be based, for example, on an effective annual interest rate of five percent (5%). If the guarantor is able to earn a long-term return-on-investment of eight percent (8%), this additional three percent (3%) is profit to the guarantor. Because of the relatively low guaranteed interest rate provided by a fixed annuity, compared to potential rates of return on investments, relatively few fixed annuity plans are sold during periods of high investment return potential.
To offset the loss of sales in fixed annuities during periods of economic growth, insurance companies and other institutions offer variable annuity plans. In a variable annuity plan, the investor chooses among a variety of investment options, such as mutual funds, and the periodic payment generally is based on the current value of each of the selected options. As such, the investor assumes the long-term market risks, and the provider of the annuity provides administrative services. In a conventional variable annuity, the payment amount is adjusted periodically, based on the current value of the investment.
Because the investor assumes all of the risks, all of the gains realized by a favorable market, if any, are credited to the investor. Correspondingly, all losses, if any, are deducted from the investor's principal. The periodic payments will vary depending upon increase or decrease in the value of the investments. The investor assumes the long-term risk of diminishing the principal to such an extent that the periodic payments are substantially decreased, and also assumes the short-term risk of reduced payments during periods of a depressed market. In a rapidly changing economy, the fluctuation in payment amounts can be disconcerting or, more significantly, may not provide the amount required to meet the needs for which the annuity was established.
Hybrid variable-rate annuities are available, at an additional cost to the investor, wherein the annuity is guaranteed not to decrease below a minimum payment amount. In such a plan, the guarantor is assuming some of the long-term risk in return for the additional cost to the investor. In a hybrid variable-rate annuity, the minimum payment amount is often substantially lower than the payment amount that is provided in periods of high investment return. The minimum payment amount provides a ‘floor’ below which the periodic payment will not drop, but having this floor does not eliminate the fluctuations in payment amounts that are based on the current profits or losses provided by the investment.
The fluctuations in payment amounts can be controlled somewhat by ‘filtering’ the present investment value that is used to determine the annuity payments. For example, a running average of the present value of the investment may be used to eliminate very short-term peaks and dips from the value used to determine the annuity payments. Generally, however, a running average “lags” the present investment value such that general increases or decreases are not immediately reflected in the running average. Hence, the increase or decrease in the annuity payment is delayed relative to the actual increase or decrease in the investment value. This can be particularly problematic, however, when investments are performing poorly, which results in the annuity payments being higher than the actual investment value warrants, thereby depleting the investment more quickly than the rate that the investment value can actually sustain.
Therefore, notwithstanding the available annuity products and options, there is a need for a system, method, and computer program product for providing stabilized annuity payments and control of investments in a variable annuity: (1) that can provide a cushion against market volatility, maintaining stable annuity payment amounts during periods of poor investment performance; (2) that can provide the annuitant with control of investments in the variable annuity, allowing the annuitant to shift investments among portfolios and other investment options; (3) that can provide the opportunity for increased annuity payment amounts during periods of favorable investment performance; (4) that can provide (in addition to annuity payments) full cash value liquidity by providing the annuitant with access to the full cash value of the variable annuity; (5) that can provide a death benefit for the annuitant's beneficiaries, allowing the annuitant's beneficiaries to receive the full cash value of the variable annuity as ongoing payments or as a lump sum; and (6) that can reduce the risk that the investment value of the variable annuity will be depleted by making annuity payments that are based on dated investment evaluations as a means of attempting to stabilize annuity payment amounts.